Question

Which of the following is/are FALSE about the slope of the Capital Allocation line?

a) it increases as the risk-free rate decreases, all else equal

b) it decreases as the risk of the asset increases, all else equal

c) it is positive if the asset's return is above the risk-free return

d) it is zero if the asset has zero variance

e) it is equal to the sharpe ratio

Answer 1

(B) False : It increases as the risk of asset increases as along with the risk, return also increases.

A, B , D, and E are the properties of Capital allocation lines and hence are True. Slope of CAL = (Rp-Rf) / Standard deviation, which is equal to the sharp ratio. As it can be seen in the graph below, the slope increases as the Rf decreases and vice versa. Also, when variance is zero, the line is attached to Y axis, and therefore the slope is zero.